Category: Corporations; Deductions & Credits Copyright 1998, The Tax Resource Group. All rights reserved. Telephone 800-578-3498. Internet: www.taxresourcegroup.com Facts Taxpayer (TP) is an S corporation which is the successor entity to a large group of medical professionals consisting of approximately 25 physicians. The stock of TP is entirely owned by the 25 physicians, all of whom are employees of TP. Many, if not all, the physicians have automobiles which are used in part for business. It is TP's intention to reimburse or otherwise bear the cost of the business portion of the automobile usage. TP has made a policy decision that there will be no corporately owned vehicles; accordingly, TP wishes to develop a coherent policy for reimbursing the various physicians for their business automobile usage. Issues 1. Is it possible to use different reimbursement methodologies among the same group of employees? In other words, is consistency required? 2. What are the tax considerations for TP and the shareholder employees in developing a policy with respect to automobile reimbursements? Findings 1. Our research did not uncover a requirement of consistency with respect to how a taxpayer reimburses various employees for automobile usage. 2. See discussion set forth below. Discussion 1. Consistency In the area of employer provided automobiles, there are special rules (called the fleet valuation rules) which allow the taxable value of employer provided vehicles to be determined on a fleet average basis as opposed to a vehicle-by-vehicle basis. There is a consistency rule in this context, but consistency must be maintained between employer and employee treatment. See Regulation §1.61-21(c). Since you mentioned consistency for fleet vehicles when we discussed your case, perhaps this is the consistency rule which prompted you to raise the issue. It seems clear that the fleet consistency rule just described applies only in the context of employer provided (i.e., employer leased or owned) vehicles and should not affect the matter with which you are concerned. 2. Tax Considerations of TP's Reimbursement Policy As you know, the following methods of reimbursing automobile costs are in common use. 1. The cents-per-mile method, currently 28 cents per mile. Given your level of experience as a practitioner, I assume that you are thoroughly familiar with the first three methods. The fourth method, FAVR, is somewhat recent and far less common. The details of the FAVR method are set forth at Section 8 of Rev. Proc. 91-67, 1991-2 C.B. 887. It appears that FAVR is not available in your case because all the participants in your plan will be shareholders and members of management. TP's policy for reimbursing employees for automobile expenses must take into consideration a number of tax factors including the following. 1. Is the employer required to include the reimbursement in wages? 2. What are the employer and employee record keeping requirements? In essence, who will bear the brunt of the record keeping for these automobiles, the employer or the employee? 3. Effect of 2% floor on individual miscellaneous itemized deductions. 4. Luxury car rules for leased and owned vehicles. 5. Convenience of employer/condition of employment requirements. Income inclusion, record keeping, and 2% floor Based on our discussions, the physician-shareholders appear to want to be reimbursed for actual expenses of owning and operating their vehicles. The foregoing materials suggest three alternatives. 1. Establish an accountable reimbursement plan under regulation sections 1.274-5T and 1.62-2 under which the physicians are required to account to TP for the business percentage of their actual automobile expenses. Reimbursements would then be classified into two categories, deductible and nondeductible. Nondeductible amounts result from the application of provisions such as the luxury car rules and §163(h)(2)(A). The deductible reimbursements are excluded from income and the definition of wages subject to withholding. The nondeductible amounts are included in the physician's wages. This alternative places the record keeping burden on TP. 2. Provide a generous, fixed amount as a car allowance and let the physicians worry about record keeping. In this case, the entire allowance is included in wages and subjected to withholding. TP's record keeping burden is shifted to the physicians. Also, the physicians will suffer from the 2% "haircut" on miscellaneous itemized deductions. 3. In conjunction with an accountable plan, provide a mileage reimbursement amount which is substantially in excess of the 28 cents per mile standard allowance. The 28 cents per mile portion is excluded from the employee's income and wage withholding. The excess is included in wages subject to withholding. The physicians would personally deduct any expenses in excess of 28 cents per mile, and such excess would be subject to the 2% rule for itemized deductions. Again the record keeping burden is shifted to the physicians, but this methodology decreases the amount of the reimbursement subject to wage withholding and the 2% miscellaneous deduction "haircut". The amount of reimbursement subject to payroll taxes may be significant even to high income individuals such as these physicians if the present proposal to extend the Hospitalization Insurance portion of FICA to all wages is enacted. Luxury Automobile Rules Convenience of employer/condition of employment |
